August Commentary
GLOBAL MARKETS
Market volatility increased on signs of economic weakness, despite the benefits of moderating inflation and lower interest rates.
US MARKETS
Disappointing tech giants tempered overall returns
Despite strong corporate earnings, with about two-thirds of S&P 500 companies beating analysts' expectations, four of the 'Magnificent Seven' tech giants disappointed, causing a tech sell-off before a month-end rebound. U.S. inflation softened faster than expected. The Consumer Price Index (CPI) fell to 3% in June, while Core CPI, excluding food and energy, rose by 3.3%, which was slightly below expectations, spurring speculation about potential interest rate cuts. This reflects a dovish outlook amid signs of a slowing economy and softening labour market, and prompted a shift from mega-cap companies to more interest rate-sensitive areas like small caps.
Up 1.1% (US 500)
UK MARKETS
Positive economic momentum propelled marketing returns
UK equities outpaced global counterparts, with the FTSE All-Share index rising 3.1%. This growth is attributed to robust PMIs in the service sector for July, in addition to economic growth in the second quarter that surpassed expectations, both indicating a positive shift in economic momentum. Certain sectors within the FTSE All-Share, such as energy and consumer goods, have shown strong performance, contributing to the rise in the overall index. The general UK election did not cause any significant market fluctuations, as a Labour win was widely anticipated.
Up 3.1% (UK All Share)
EUROPEAN MARKETS
Mixed performance and data led to modest gains
European stocks posted modest gains for the month, with a disappointing PMI report (indicating a slight slowdown in eurozone economic growth over the summer) and uncertainties around the French elections weighing on performance. However, Eurostat's GDP estimates showed a 0.3% increase in Q2 2024 for both the euro area and the EU. However, Germany's contracted by 0.1%, a further sign of economic challenges for the bloc’s largest economy. Annual inflation in the Euro Area unexpectedly rose to 2.6% from 2.5%, defying forecasts which had anticipated 2.4%. European bonds had a strong month, with peripheral bonds outperforming core bonds.
Up 0.6% (Euro 600 Index ex UK)
JAPAN MARKETS
Underperformed other developed markets
The Japanese TOPIX index underperformed, with the decline partly due to weakness in global technology shares, exacerbated further by a strengthening yen. Anticipation of an earlier Federal Reserve rate cut, and the Bank of Japan’s decision to raise its interest rates, contributed to the yen’s appreciation against the US dollar. As part of its monetary policy normalisation, the Bank of Japan raised its policy rates from a 0%-0.1% range to 0.25%. Additionally, it announced a reduction in Japanese Government Bond (JGB) purchases by 400 billion yen per quarter, which will start in August.
Down -0.5% (Japan Index)
Key Points
• The US dollar had a volatile month versus major currencies, but ended the month marginally weaker against sterling and the euro. However, the US dollar weakened significantly against the yen, as speculation of rates hikes drove the yen higher.
• The Japanese yen strengthened significantly against the major currencies throughout July, driven by speculation of potential rate hikes and currency intervention by the Bank of Japan.
• Sterling strengthened against the US dollar, as lower US inflation data increased speculation of a US rate cut.
• The euro marginally strengthened against the U.S. dollar but weakened slightly against sterling. However, early gains were tempered, as ECB policymakers indicated there was no rush to cut rates further.
Key Points
• Global bond markets had a strong month, with government bonds performing particularly well. The bond markets were buoyed by heightened expectations of rate cuts taking place.
• US Treasuries gained over the month, driven by speculation of a Federal Reserve rate cut.
• With the bond market anticipating further interest rate cuts by the European Central Bank, eurozone government bonds continued to perform well.
• UK gilts underperformed global bond markets, with stronger-than-expected GDP growth, and persistent services inflation, tempering rate cut expectations.
• Corporate and high-yield bonds underperformed government bonds but still delivered positive returns over the month.